KEY POINTS:
As the fallout from the $500 million collapse of Bridgecorp continues, the call for big changes in the way financial advisers earn their money is starting to gather pace.
New Zealand financial advisers are now moving towards charging clients flat fees rather than taking commission from finance companies
- and if they do earn a commission this should be passed on to the client, says David Hutton, Institute of Finance Advisers chief executive.
Institute members are meant to disclose to clients if they are earning a commission and adhere to a code of ethics, says Hutton.
He says he has had a number of calls in the past week from people concerned about advice received from their financial adviser.
A number of the institute's 1450 advisers are already charging fees, but Hutton hopes this becomes a more industry-wide policy in the wake of the Bridgecorp collapse, and concerns that it was incentivising financial advisers with higher than market rate commissions.
Hutton believes Bridgecorp was offering 3 per cent interest rates over three years, rather than 3 per cent per year as some are claiming.
Chief executive of the Investment Savings and Insurance Association, Vance Arkinstall, applauds the idea of going "strictly fee only" and says the move is long overdue.
Given the warning signs in the market, Arkinstall says people who were advised to invest in Bridgecorp in the past year should be going back to their financial advisers and "having a very serious discussion" with them about their motivation and any commission they might have received.
Were they accepting fees and other incentives to invest in the company which had a question mark over it?
"I think there are a number of investment advisers who have to think very, very seriously about the quality of advice that they have been giving on Bridgecorp, particularly those who put money into Bridgecorp," says Arkinstall.
"Anybody worth their salt would have heard. You go to an adviser expecting professional advice and you pay for that adviser either through a fee or commission. Either way they are rewarded and you should expect a better job."
Former financial planner Simon Hardie, who set up "The Shape of Money" website, says many financial advisers were driven by commission for simple financial reasons.
"If an employee is offered twice as much remuneration - $100,000 instead of $50,000 - of course they were going to go for the $100,000 offer," he says.
"My advice is to go to an adviser who charges you a fee."
Those who have good research capabilities are better placed to make a decision about an investment.
Financial adviser Greg Moyle, principal of NZ Financial Planners, warns there could be some court cases coming out of the Bridgecorp failure.
Moyle, whose company charges fees and does not take commission, says if someone goes to a financial adviser, they should be interested in knowing what process they go through before making any recommendation.
"Was there a proper needs analysis, did they look at risk profiling and so on? And if they did these things why did they recommend that type of product? Was it because of the commission?" If investors are suspicious of this they "should be talking to their lawyer", says Moyle.
Last week, litigation lawyers responded cautiously to the idea of lawsuits coming from the Bridgecorp collapse. They will first be waiting to hear what the Securities Commission and the receiver, PWC, says about any irregularities, and also how much of their money investors will be getting back would be relevant.
Michael Arthur, a partner at Chapman Tripp, the solicitors acting for the Bridgecorp receivers PWC, says there is little case history of financial advisers being sued by clients in comparison with lawyers and accountants. Most people weren't putting large sums of money into fixed-interest rate debentures, so there was less incentive to take their case to court, which could cost them close to the amount that they had lost.
"Another reason might be that a lot of what financial planners are doing is a question of judgment, but it's hard to say that someone is negligent in exercising their judgment," says Arthur.
Advisers have to be proven to have advised "recklessly" adds Hutton, and the advice has to be written down so there's a paper trail.
The solicitor to PWC says people were putting money into Bridgecorp right to the bitter end.
Was it up to financial advisers to warn their clients that there was bad news coming?
"If they know something the client should be told about, they are duty bound to make that disclosure. They are acting as the agent of the client, they are not Bridgecorp's representative," says Arthur.
Unhappy investors could take action through the Consumer Guarantees Act when advisers have a "duty of care" responsibility, he says.
Of course the NZ investor does not come out blameless in the piece.
Some advisers who put money into Bridgecorp were trying to please investors who wanted a product which gave them a secure, not volatile, income unaffected by currency fluctuations, says Jeff Matthews, senior financial planner at Spicers Wealth Management, which does not invest in finance company debenture stocks.
There is a general reluctance in NZ to pay for good advice. People prefer the DIY approach or for their adviser to get paid by someone else.
Kiwi investors still do not like paying for advice, says Financial Vision director, Nick Duff. In America, he says, if someone is advised to buy something and there is no fee involved, they are suspicious. People here grab it with both hands.
"Kiwis are the last people in the universe who believe in a free lunch," says Duff, who dissuaded an 81-year-old from investing his money with Bridgecorp about 10 days before it went under. "We are saving people from themselves, from unbelievable blunders," he says.
It is not just in New Zealand that people are losing their shirts on investing in rocky finance companies.
In Australia, there have been four finance company collapses in the past couple of years, including the Australian arm of Bridgecorp, and financial advisers there are also coming under increased scrutiny.
Gavin Gunning, director of Standard & Poor's, set to speak at this coming week's IFA conference on finance company failures, says there has been close to $1 billion of retail money lost so far.
"Financial advisers have been looking at strengthening their understanding about non-bank deposit takers' ratings and how credit ratings can assist them in better understanding risk in the NZ NBDT sector," he says.
Standard & Poor's believes credible credit ratings will help NZ financial advisers to make recommendations to retail clients, but Gunning warns ratings are not by themselves a "silver bullet" as they are no substitute for adequate market disclosures by companies and competent investor advice.
Acumen financial planner and writer Lisa Dudson will continue to put money into certain trusted finance companies, such as Strategic Finance, Marac and Hanover, as long as it was part of a diversified portfolio.
She finds it hard to believe that advisers were putting clients' money into Bridgecorp with the knowledge that the company was in trouble.
"I think it's tragic what happened with Bridgecorp, it's almost worse for the industry because of the damage."
Dudson says advisers didn't make much money out of fixed-interest products and commission was something that worked in a number of industries.
"This is a tough business to make a lot of money. There are much easier ways to make a living," she says.
Glenn Walker, managing director of Geneva Finance, has put a brave face on the beleaguered industry, delivering some respectable results from the company, which had a $4 million profit for the year ended March 2007 - an increase on the previous year's result of $3.789m.
During the same period, revenue has grown from $37m to $48.6m, with total assets sitting at $171m, up from $142m the year before.
Geneva is still thought of as "the new kid on the block" and has had to work harder to win business from financial planners.
Its retail customers for fixed-interest products have largely come from New Zealand, who do not take financial advice. Walker says about 10 or 12 per cent of funds came through financial planners.
With a $50m line of credit from the Bank of Scotland, Geneva will keep marketing its services to "mum and dad investors", says Walker. The percentage of people rolling over from one fixed-interest product to the next had fallen. "Some of the confidence has ebbed," he says.
Although not in the investment grade category some financial planners demand, Walker says his aim is to be transparent and open to investors. about how Geneva works.